Potenzialprodukts

Potenzialprodukte are financial instruments issued by banks or savings banks in Germany to medida the potential investment risks associated with new business loans. The term "Potenzialprodukt" directly translates to "potential product" in English.

These instruments were introduced in the 1990s as part of the German reform of banking regulation, which aimed to increase transparency and liquidity in the banking system. Under the new regulations, banks were required to comply with the Interstate Treaty on Cooperative Banking, which stipulated that they could only rely on the equity capital of their clients in a very limited number of instances.

Potenzialprodukte issue shareholders' funds for a particular business in lieu of equity capital from the business itself. The banks guarantee the repayment of these shares, while the default risk arises in the event that the company issuing the shares provides no effective guarantee. As a result, this arrangement creates potential losses for the bank but also allows banks to take on risks that they might not normally be able to take on by accepting lower capital requirements.

Investors in Potenzialprodukte typically hold a stake in the equity capital of a specific company or an entity that acquires a stake in that company. The financial instruments are usually tied to specific company interests and allow banks to share the investment risk with private investors.